WASHINGTON – The Federal Reserve, in an extraordinarily rare weekend move, took bold action Sunday evening to provide cash to financially squeezed Wall Street investment houses, a fresh effort to prevent a spreading credit crisis from sinking the U.S. economy.

The central bank approved a cut in its emergency lending rate to financial institutions to 3.25 percent from 3.50 percent, effective immediately, and created a lending facility for big investment banks to secure short-term loans. The new lending facility will be available to big Wall Street firms on Monday.

The Fed acted just after JP Morgan Chase & Co. agreed to buy rival Bear Stearns Cos. for $236.2 million in a deal that represents a stunning collapse for one of the world’s largest and most venerable investment banks. Just on Friday the Fed had raced to provide emergency financing to cash-strapped Bear Stearns through JP Morgan. Days earlier the Fed announced a set of other unconventional steps to thaw out a credit market in danger of freezing shut.

“It seems as if Bernanke & Co. are pulling out all the stops to avoid a serious financial market meltdown,” Richard Yamarone, an economist at Argus Research, said Sunday evening.

On world financial markets, Asian stocks plunged early Monday after the JPMorgan and Fed announcements. Markets in Australia and New Zealand also fell.

The new lending facility – described as a cousin to the Fed’s emergency lending “discount window” for banks – is geared to give major investment houses a source of short-term cash on a regular basis – if they need it.

It will be in place for at least six months and “may be extended as conditions warrant,” the Fed said. The interest rate will be 3.25 percent and a range of collateral – including investment-grade mortgage backed securities – will be accepted to back the overnight loans.

“This is the Fed as the Yucca Mountain of securitized debt, but it is no doubt necessary,” said Terry Connelly, dean of Golden Gate University’s Ageno School of Business, referring to the government’s underground dump in Nevada for nuclear waste.

Treasury Secretary Henry Paulson said he was pleased by Sunday’s developments.

“Last Friday, I said that market participants are addressing challenges and I am pleased with recent developments. I appreciate the additional actions taken this evening by the Federal Reserve to enhance the stability, liquidity and orderliness of our markets,” he said.

“We appreciate the actions taken by the Federal Reserve this evening,” said White House press secretary Dana Perino. “Secretary Paulson and Chairman Bernanke are actively engaged in addressing issues affecting our financial markets. Secretary Paulson has kept the president briefed on recent developments.”

The “discount” rate cut announced Sunday applies only to the short-term loans that financial institutions get directly from the Federal Reserve. It doesn’t apply to individual borrowers.

The Fed’s actions are the latest in a recent string of innovative steps to deal with a worsening credit crisis that has unhinged Wall Street. And, the action comes just two days before the central bank’s scheduled meeting on Tuesday, where another big cut to a key interest rate that affects millions of people and businesses is expected to be ordered. That key rate is now at 3 percent and is expected to be cut by at least one-half percentage point on Tuesday. Analysts said the Fed’s new steps may lessen pressure for a super-sized cut to that rate.

The Fed said in a statement that the steps are “designed to bolster market liquidity and promote orderly market functioning … essential for the promotion of economic growth.”

Even with the Fed’s aggressive moves, economic and financial conditions keep deteriorating. An increasing number of economists believe the country already has slipped into its first recession since 2001. Many economists think that the economy is shrinking now in the January-to-March quarter. The first government figures on first-quarter economic activity will be released in late April.

The Fed on Sunday also approved the financing arrangement through which JPMorgan will acquire Bear Stearns. JP Morgan said the Fed will provide special financing for the deal. The central bank has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets, according to JP Morgan.

The housing collapse and credit crisis has dealt a one-two punch against financial companies and the economy as a whole. Financial institutions have racked up multibillion-dollar losses when mortgage-backed investments soured. Foreclosures have hit record highs as distressed borrowers – hit by slumping home prices and higher mortgage rates – couldn’t make their monthly payments. It has become a vicious cycle.

The Fed this past week said it would pour as much as $200 billion into big Wall Street banks and investment houses and allow them to put up risky home-loan packages as collateral to borrow much-in-demand Treasury securities. This maneuver – slated to start on March 27 – was intended to bring sorely needed relief in the market for mortgage securities. The Fed also has offered as much as $200 billion in short-term loans to banks and large financial institutions.

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